5 minute read
The potential for growth
While Shariah principles align well with contemporary considerations and Islamic banking and finance’s market share continues its global expansion, Ahsan Ali, Managing Director, Global Head of Islamic Origination at Standard Chartered Bank explains that harmonisation will be a catalyst for further growth
Ahsan Ali, Managing Director, Global Head of Islamic Origination, Standard Chartered Bank
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Sukuk instruments remain more complex and time consuming for issuers when compared with conventional bonds, so do you expect to see meaningful moves toward streamlining of Sukuk issuance to heighten attractiveness?
In the early stages of Sukuk market development, they were certainly viewed as complex structures that required additional time for structuring, documentation and execution. However, over the past decade the Sukuk issuance process and documentation has become much more streamlined as the parties involved (such as legal counsels, rating agencies, Shariah scholars, arrangers, issuers and investors) have come up the learning curve in terms of their knowledge and understanding of this product. I believe that currently the process is quite streamlined and manageable, however, moves to further standardize are always welcome.
The Sukuk instrument overall remains attractive to issuers because it provides investor diversification and access to the Islamic pool of liquidity, which is growing in line with the market share of Islamic finance in the core Islamic countries.
Do you see the GCC/Middle East taking a lead over other Islamic finance centres in Islamic financial activity and innovation as the world emerges from the pandemic?
As a leading international bank with an Islamic business spread over multiple markets, we have had the privilege to work with policy makers and regulators across the globe in helping develop the regulatory infrastructure. Our experience has been that all centres of Islamic finance both collaborate and compete in a healthy way, with a common goal
of boosting the overall Islamic market share. As we know, the GCC countries and Malaysia have long been considered the two hubs of Islamic finance, not surprisingly as both have large domestic markets to support their growth ambitions. We have also seen traditional centres of conventional finance such as London, Hong Kong, Singapore etc. create regulatory infrastructure to enable and promote Islamic financial services in their jurisdictions. Significant policy and regulatory initiatives are also underway in markets such as Pakistan, Bangladesh and Indonesia, and many African countries.
In the GCC, the large and strong Islamic banks coupled with supportive government and regulatory initiatives are paving the way for a robust growth. The UAE in particular is making a major push to be the centre of Islamic economy, reflected in the world’s first Islamic trade finance bank to be established in Dubai and the launching of a new initiative for the creation of a unified global legal and legislative framework for the Islamic finance sector. These developments bode well for the growth of Islamic finance.
Do you think that the principles of Islamic finance are better suited to the economic recovery of nations post -pandemic?
In principal, Islamic finance is closely aligned with the real economy, as many of its products are structured around trade and asset flows. Hence, the integration of Islamic finance into economies as they recover from the pandemic will most probably result in a solid and sustainable impact and growth in real economic activity.
In the light of the rise of ESG considerations and socially responsible business and investments, do you predict a burgeoning role for Islamic Finance in global financial activities?
The Shariah principles which underline Islamic economics and finance encourage wholesome and sustainable development of communities, countries and the world. This is pretty much aligned with the goals of sustainable, green and social financing, and therefore provides a natural fit between Islamic and sustainable financing.
However, it is true that green and sustainable financing within Islamic finance is still at an early stage and has not yet been explored to its full potential. One challenge has been the availability of suitable green assets or of projects big enough to be used in structuring a green sukuk. But this should ease soon as governments, quasi-sovereign entities and large corporates are increasingly embedding green and sustainability principles as their core objectives. Also, while we haven’t seen many dedicated Islamic green investors, the awareness
is certainly increasing on that front too.
Nonetheless, the green and sustainable sukuk market has seen many landmark transactions, led by sovereigns such as the Republic of Indonesia, which issued its first sovereign green sukuk, worth US$1.25 billion, in 2018, followed by US$750 million in 2019 and a US$750 million green sukuk in June 2020. Also there have been multilateral institutions such as the Islamic Development Bank, which issued its first-ever green sukuk, worth EUR 1 billion, in 2019 and followed this with the first-ever COVID-19 response sustainability sukuk in June 2020, worth US$1.5 billion. We have also witnessed a few corporates riding the green wave. Majid Al Futtaim issued a US$600 million green sukuk – the world’s first corporate green sukuk, Saudi Electricity Company issued a dual-tranche US$ 1.3 billion green sukuk and Etihad Airways issued the first ever sustainability-linked transition Sukuk – a US$600 million issuance in October 2020
Would global common standards be a boost for the wider uptake of Islamic financial services and the financial markets of Islamic nations?
The standardization of Islamic structures and legal documentation and having one common understanding of the Islamic Banking principles across the industry would certainly be a catalyst for growth and expansion across markets.
While it is true that differing Shariah principles across jurisdictions have muted standardisation efforts in the past, there is now a concerted effort
by central banks and regulatory bodies to adopt common Islamic standards across their markets. Industry bodies such as AAOIFI and IIFM (International Islamic Financial Market) are also significantly contributing to these efforts by publishing standards and creating documentation for commonly used products and structures.
With standardisation and harmonisation, we can also start seeing the digitization of the industry and the wider adoption of technologies which would help in automating and streamlining the processes of Islamic banking products and specifically sukuk issuance, especially for retail issuance. This would certainly help bring down the cost of issuance, as well as help the sukuk market move away from the currently largely institutional market to the retail space.
